Strength Agility Canadian Oil Sands Trust 2009 Annual Report

Transcription

1 Strength Agility Canadian Oil Sands Trust 2009 Annual Report

2 ADVISORY In the interest of providing Unitholders and potential investors of Canadian Oil Sands Trust (the Trust or Canadian Oil Sands ) with information regarding the Trust, including Management s assessment of the Trust s future production and cost estimates, plans and Syncrude operations, as well as the proposed conversion to a corporate structure, certain statements throughout this annual report contain forward-looking statements under applicable securities law. Forward-looking statements in this annual report include, but are not limited to, statements with respect to: the ability of Syncrude s reserve base to support production at 350,000 bpd for decades; the outlook for 2010 on page 3, including without limitation statements regarding production, operating costs, realized selling price, the differential to West Texas Intermediate crude oil, the movement of mine trains and capital expenditures related thereto, the expectation for crude oil prices; Syncrude s resource base providing a long-life cash generating asset base and that all the bitumen can be produced by open pit mining with recovery rates of about 90%; the expectation that we have the ability to substantially grow production at Syncrude through controlled expansions; the expected levels of maintenance capital and growth capital over the next few years; the expectation to grow production to 350,000 bpd and eventually to 600,000 bpd of bitumen and 425,000 bpd of synthetic crude oil; expansion plans regarding bitumen capacity and upgrader debottlenecking; the expectation of achieving the production design rates from Coker 8-3 and Stage 3; the actual recoverable amounts from any reserves or resources; plans regarding net debt levels; plans to convert to a corporate structure on or about December 31, 2010; the belief and plans regarding improved reliability and lower costs as well as overall improved operations at Syncrude flowing from the Management Services Agreement between Syncrude Canada and Imperial Oil; the belief that demand for our synthetic crude oil product will grow and that it will benefit both our revenues and cost structure; the expected investments and costs related to environmental legislation and regulations; the proposed reduction in sulphur dioxide and other emissions; the expectation that Syncrude will continue to develop better and more sustainable practices; the short-term and long-term goals for operations, growth, distributions and the business environment; the expected improvement in energy efficiency; the productive capacity that can be achieved in the future; the quality of Syncrude s leases; the plans to reduce sulphur dioxide emissions to less than 60% of current approved levels through the Syncrude Emissions Reduction project; the belief that Syncrude can add production more easily and cheaper than a greenfield operation; the plans for 2010 with regards to turnarounds and maintenance; the expectation of cheaper and more technologically advanced operations flowing from the agreement with Imperial Oil regarding Kearl Lake and Syncrude s mine relocations; the expected timing and associated production impact of coker and other unit turnarounds in 2010; the expected revenues, operating costs and cash from operating activities for 2010; the anticipated impact that certain factors such as natural gas and oil prices, foreign exchange, operating costs and Crown royalties have on the Trust s cash from operating activities and net income; the expected capital expenditures in 2010 and beyond; current plans to remain unhedged; impact on distributions as a corporation rather than a trust; our expectations on our ability to reach design capacity; plans regarding expanding Syncrude s production capacity. You are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Trust believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this annual report include, but are not limited to: the supply and demand metrics for oil and natural gas; general economic, business and market conditions and in particular, the impact of any downturn in the economy and the length of such economic recession; risks inherent to the operation of any large, complex refinery units, especially the integration between mining operations and an upgrader facility; regulatory changes which may impact the penalties on greenhouse gas emitters and operators with tailings ponds ; labour shortages and the productivity achieved from labour in the Fort McMurray area; the impact of technology on operations and processes and how new complex technology may not perform as expected; currency and interest rate fluctuations; the availability of pipeline and global refining capacity; changes in business strategy; the availability and price of energy commodities; regulatory decisions; the effects of competition and pricing pressures; shifts in market demands; changes in laws and regulations including environmental and regulatory laws; potential increases in costs; timing of completion of capital or maintenance projects; the availability of adequate levels of insurance; various events which could disrupt operations including severe weather conditions; technological changes and management retention and development; such other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Trust, including those outlined in the Management s Discussion and Analysis ( MD&A ) in this annual report and the assumptions outlined in the guidance for 2010 actually occurring. You are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this annual report are made as of the date of this annual report and unless required by law, the Trust does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this annual report are expressly qualified by this cautionary statement. In any reference to resources in this annual report, there is no certainty that any portion of the resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources. Unless otherwise specified, all dollar amounts are expressed in Canadian dollars, all references to dollars or $ are to Canadian dollars and all references to U.S.$ are to United States dollars. NON-GAAP FINANCIAL MEASURES In the MD&A we refer to financial measures that do not have any standardized meaning as prescribed by Canadian generally accepted accounting principles ( GAAP ). These non-gaap financial measures include cash from operating activities on a per Unit basis, net debt, total capitalization, return on average Unitholder equity, return on average productive capital employed, and certain per barrel measures. Cash from operating activities per Unit is calculated as cash from operating activities reported on the Trust s Consolidated Statements of Cash Flows divided by the weightedaverage number of Units outstanding in the period. This measure is an indicator of the Trust s capacity to fund capital expenditures, distributions, and other investing activities without incremental financing. In addition, the Trust refers to various per barrel figures, such as net realized selling prices, operating costs and Crown royalties, which also are considered non-gaap measures, but provide meaningful information on the performance of the Trust. We derive per barrel figures by dividing the relevant revenue or cost figure by our sales net of purchased crude oil volumes in a period. Non-GAAP financial measures provide additional information that we believe is meaningful regarding the Trust s operational performance, its liquidity and its capacity to fund distributions, capital expenditures and other investing activities. Users are cautioned that non-gaap financial measures presented by the Trust may not be comparable with measures provided by other entities.

3 strength \strengkth\strenth\ noun: the state or quality of being strong; a capacity for endurance or exertion; a strong attribute or inherent asset synonyms: stability, power, energy agility \a-gil-i-ty\ noun: the state or quality of being quick, resourceful and adaptable; the ability to think quickly synonyms: activity, quickness, adaptability 1 Table of Contents Trust Profile/Highlights Performance and Plan Strong Asset Agile Management President s Message Q&A Oil Sands Principles Strategic Focus Management s Discussion and Analysis Management s Report Independent Auditors Report Consolidated Financial Statements Notes to Consolidated Financial Statements Glossary and Abbreviations Statistical Summary Unitholder Information Inside Back Cover

4 Trust Profile Syncrude Joint Venture Canadian Oil Sands is the largest joint venture owner Canadian Oil Sands Petro-Canada Oil and Gas of Syncrude, a major producer of light, sweet, synthetic crude oil from Canada s bitumen-rich oil sands. Formed Limited (Suncor) 12% 36.74% in 1995, Canadian Oil Sands generates revenue from its ConocoPhillips Oilsands Partnership II 9.03% share of production, and has a history of paying quarterly Imperial Oil Murphy Oil Company 5% Mocal Energy Limited 5% Resources Nexen Oil Sands 25% Partnership 7.23% distributions. As a pure investment in Syncrude, and led by an experienced hands-on management team, Canadian Oil Sands is a unique investment in long-term crude oil assets. Syncrude s productive capacity is 350,000 barrels per day and its reserve base could support production at that level for decades. Canadian Oil Sands has a market capitalization of about $14 billion* and is listed on the Toronto Stock Exchange under the symbol COS.UN. * as at February 23, 2010 Trust Highlights % Change 2 Financial ($ millions, except per Trust Unit amounts) Revenues, after crude oil purchases and transportation 2,615 4,169 (37) Net income 432 1,523 (72) Per Trust Unit, Basic (72) Per Trust Unit, Diluted (72) Cash from operating activities 547 2,241 (76) Per Trust Unit (76) Unitholder distributions 435 1,804 (76) Per Trust Unit (76) Ratios Net debt to cash from operating activities (times) Net debt to total capitalization (%) Return on average Unitholders equity (%) Return on average productive capital employed (%) 7 34 Operations Sales volumes, net of crude oil purchases Total (mmbbls) (3) Daily average (bbls) 103, ,986 (3) Operating costs ($/bbl) Capital expenditures ($ millions) Net Synthetic Crude Oil realized selling price ($/bbl) (35) Average West Texas Intermediate (U.S.$/bbl) (38) Average foreign exchange rate (U.S.$/Cdn$) (6) Unit Information Closing price on December 31 ($/Trust Unit) Weighted-average units (millions) All references to dollars or $ are to Canadian dollars and all references to U.S.$ are to United States dollars. A five-year statistical summary is provided on page 84.

5 Performance and Plan Outlook 1 Actual Actual vs Outlook Outlook 2 Sales 3 (mmbbls) Midpoint of 42.3 Operating Costs ($/bbl) $30.76 $35.29 Cash from Operating Activities ($/Trust Unit) 4 $1.55 $1.13 X Missed guidance Turnaround and modification work on Coker 8-3 complex took longer than anticipated. Bitumen supply was constrained in the first quarter. Unplanned maintenance on the Vacuum Distillation Unit. Lower than anticipated reliability. X Missed guidance Lower than anticipated production (as aggregate operating costs are largely fixed, per barrel operating costs are affected by variances in production). Additional costs to expand Syncrude s mining fleet. X Missed guidance Primarily reflects increase in non-cash working capital. Revenues were actually higher than our Outlook as a result of crude oil prices averaging $62.09 per barrel in 2009 versus our assumption of $50 per barrel. However, higher than anticipated crude oil prices were offset by lower sales, higher operating costs and higher Crown royalties Midpoint of 42.3 $35.04 $2.09 Capital Expenditures ($ millions) $440 $ Outlook as at January 28, 2009 based on the Trust s 36.74% Syncrude interest Outlook as at January 28, 2010 based on the Trust s 36.74% Syncrude interest. 3 The Trust s sales volumes may differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes, and are net of purchased crude oil volumes. 4 Non-GAAP measure. On budget Expenditures primarily related to maintenance of business and the Syncrude Emissions Reduction project. $541 3 The following are the key assumptions shaping our 2010 Outlook: The production estimate reflects planned turnarounds of Coker 8-1 and other operating units, and an allowance for unplanned outages. Capital expenditures primarily relate to expenditures to maintain productive capacity, which currently include major projects such as the Syncrude Emissions Reduction project and mine train moves. WTI crude oil prices averaging U.S.$70 per barrel in Syncrude receiving a discount of $2 per barrel for its Synthetic Crude Oil relative to Cdn$ WTI crude oil prices in AECO natural gas prices averaging $6 per gigajoule in The foreign exchange rate (U.S.$/Cdn$) averaging $0.95 in Changes in the following factors would impact our 2010 Outlook for cash from operating activities: $ Millions $/Unit WTI crude oil price increase (U.S.$1.00/bbl) $33 $0.07 Syncrude production increase (2 million bbls) $39 $0.08 Syncrude operating cost decrease (Cdn$1.00/bbl) $35 $0.07 Syncrude operating cost decrease (Cdn$50 million) $15 $0.03 Canadian dollar weakening (U.S.$0.01/Cdn$) $23 $0.05 AECO natural gas price decrease (Cdn$0.50/gigajoule) $17 $0.04 An opposite change in each of these variables will result in the opposite cash from operating activities impact. These sensitivities assume royalties are paid at 25% of net bitumen revenue. Canadian Oil Sands periodically updates its Outlook for 2010 on its website at under Investor.

6 Strong Asset Strength at Canadian Oil Sands centres on the assets of Syncrude. With more than 30 years of operating experience in the oil sands, Syncrude s production has surpassed 2 billion barrels of light, sweet, synthetic crude oil. A leading investor in new technologies and processes, Syncrude encompasses large oil sands mines, utilities plants, bitumen extraction plants, and an upgrading complex. The mined bitumen is upgraded to a high quality, synthetic crude oil that is sold to refineries across North America and has historically received a price close to Canadian dollar West Texas Intermediate. Syncrude s leases span some of the richest bitumen deposits in Canada s oil sands. All of the bitumen can be produced by open pit mining, with proven technologies and high rates of recovery of about 90 per cent. Reserves and Resources 1 Billions of barrels of Canadian Synthetic Crude Oil Syncrude Oil Sands 2 Fort Chipewyan (298 km 4 Proved plus probable reserves Contingent resources best estimate Prospective resources best estimate Based on independent reserves and resources estimates by GLJ Petroleum Consultants Ltd. as of December 31, See reserves and resources cautionary advisory in Canadian Oil Sands AIF dated March 22, 2010 and the definitions in the Glossary on page The Trust, through its operating subsidiary, holds a 36.74% interest in the Syncrude Project. Syncrude Expansion Plans Plans are being developed to expand Syncrude s productive capacity. A staged approach to unlock production potential in the existing upgrading facility and build bitumen supply should result in volume growth from 2015 to Through a series of debottleneck projects, Syncrude intends to capitalize on investments already made in the existing plant, enabling volumes to be brought on with lower risk and better rates of return than constructing a new upgrading facility. By the end of the decade, Syncrude expects to be producing over 600,000 barrels per day of bitumen, from which upgraded synthetic crude oil productive capacity would be about 425,000 barrels per day. The roughly 115,000 barrels per day of excess bitumen production would provide Syncrude with operational flexibility and Canadian Oil Sands with the ability to market multiple products. (Syncrude s process results in a lower yield of Synthetic Crude Oil from bitumen on a per barrel basis.) Bitumen Capacity Expansion A new mine is planned on Aurora South leases with the phased construction of two mining trains the modular processing units for mining and extracting bitumen. May include solvent de-asphalting to enable bitumen sales. Upgrader Debottleneck Syncrude s current facility has excess coking capacity. A series of debottleneck projects modifications of existing facilities with the potential addition of new units is planned to upgrade growing bitumen supply from Aurora South. Fort McKay Athabasca River Mildred Lake Mine Fort McMurray Aurora North Mine Aurora South Mine Syncrude Oil Sands Leases Clearwater River Syncrude s leases are in the sweet spot of the Athabasca Oil Sands deposit, and hold enough resource to produce crude oil over several decades. Syncrude Expansion Plans Barrels per day 700, , , , , ,000 Bitumen Productive Capacity Synthetic Crude Oil Productive Capacity

7 Agile Management The team at Canadian Oil Sands has a track record of executing a strategy to manage sudden and often dramatic changes in market conditions. That agility and expertise has led to solid performance for investors over the long term. Since 2001 when this team joined the Trust, $9.60 per Unit of cash has been distributed and total compound returns to investors have averaged 24 per cent annually (capital appreciation plus reinvestment of all distributions). These strong results hinge on prudent financial management, particularly, efficient allocation of capital, to support a strong balance sheet, take advantage of growth opportunities and return excess cash to investors. Over the past decade, Canadian Oil Sands has grown its share of Syncrude production and reserves through investments to expand Syncrude s design capacity and by acquiring additional interests in the Project. Certainly, Canadian Oil Sands trading price has historically correlated to the price of crude oil. Management s current plan of remaining unhedged exposes investors to crude oil prices. Efficient Capital Management Total Unitholder Returns (Capital Appreciation + Reinvestment of all Distributions/Dividends) $ millions 2,500 2,000 Distributions Cash from Operating Activities CAPEX $ value based on $100 invested on December 31, Canadian Oil Sands Trust S&P/TSX Composite S&P/TSX Energy Trust 1,500 1, F COS Unit Performance to WTI Net Debt to Total Capitalization at December 31 Cdn$ WTI per bbl 160 Cdn$ WTI per barrel $ per Canadian Oil Sands Trust Unit $ per Trust Unit %

8 President s Message The goals we set YESTERDAY drive the actions of TODAY which enable the success of TOMORROW. Marcel R. Coutu President and Chief Executive Officer 6 Looking back on 2009, I am proud of how we managed the Trust through the most difficult economic period in our history. Our agility in responding to the rapid drop in crude oil prices and the severe tightening in the credit markets helped us maintain a strong balance sheet, preserve liquidity and protect long-term value. Our first steps were to cut the distribution to $0.15 per Trust Unit and reinstate our distribution reinvestment plan. As conditions began to improve in the credit markets, we refinanced approximately $500 million of debt maturities, further improving our liquidity position. We emerged from the economic crisis in a strong financial position. Year-end net debt to total capitalization was only 21 per cent, essentially unchanged from the prior year. Today, our credit facilities of $840 million remain fully available, providing financial flexibility for our future. Revenues for the 2009 fiscal year reflect weaker crude oil prices and lower production volumes relative to the prior year. In 2009, we generated cash from operating activities of $547 million ($1.13 per Trust Unit). Net income was $432 million ($0.89 per Trust Unit). As crude oil prices improved over the year, we steadily increased distributions from $0.15 to $0.35 per Trust Unit, paying out a total of $435 million ($0.90 per Trust Unit) to our investors during The events of the past 18 months have confirmed for me that the financial strategy we set many years ago remains the best approach for managing our business. That strategy centres on two main principles. Firstly, we aim to maintain a strong balance sheet with relatively low debt levels when we are not funding growth projects. This helps preserve our investment grade credit ratings, supports us in remaining unhedged on our crude oil production, and provides financial capacity to take advantage of growth opportunities when they arise. Secondly, we direct the cash we generate to fund growth opportunities, but during periods of lower investment, we return that cash to investors. The cash payouts investors receive will vary, depending largely on changes in crude oil prices, our funding obligations and investment opportunities,

9 and Syncrude s operational performance. We do not intend to change this approach when we convert to a corporation at the end of That means our investors should expect cash payouts to continue to vary. I believe the strategy I just described has underpinned our ability to deliver strong returns to investors over the long term. We have historically paid a quarterly distribution, while investors anticipate longerterm capital appreciation potential. Our long-life resource, growth profile with virtually no geological or exploration risk, and an unhedged, light, sweet crude oil production stream give investors long-term exposure to a valuable commodity. We are indeed a unique investment opportunity. While much of our potential resides in appreciation of crude oil prices, we are working to maximize this potential through improved operational reliability. Syncrude experienced unplanned downtime in 2009, resulting in production of an average of 280,000 barrels per day and a total of 102 million barrels missing our target of 115 million barrels. However, significant strides were made to improve operational reliability in Extensive turnaround work and modifications were made to our Coker 8-3 complex with the goal of improving yield and run length. As well, equipment in the mines was augmented and extraction facilities were improved to increase bitumen supply. Efforts to improve operational reliability will continue through 2010, with our outlook for Syncrude production being 115 million barrels, about 90 per cent of the design capacity of 129 million barrels. Canadian Oil Sands is a long-term investment and I would like to convey my strong sense of confidence and optimism for our future. We are producing a vital commodity with strong and growing global demand. Our Syncrude asset represents a stake in one of the largest known sources of crude oil in the world. This resource became an industry providing economic benefits and jobs through Canadian ingenuity and tenacity. Today, the oil sands secure Canada s energy future. As we develop this significant resource, we are committed to improving our environmental performance. I believe ingenuity and determination will once again produce the technologies and practices to achieve further improvement in this important area. 7 My view is that crude oil prices will increase over the medium and long term, based on the relatively tight global supply and demand fundamentals for this essential, finite resource. Our task is to mitigate the shorter-term volatility in crude oil prices through prudent capital management. We have a strong team with a track record of doing just that, and our strategy is supported by our experienced Board of Directors. In particular, I would like to thank Mr. Chuck Shultz and the Rt. Honourable Donald Mazankowski for their contributions. Mr. Shultz was instrumental in the formation of the Trust and was Chairman of the Trust and one of its predecessors from 1996 to September 30, 2009, when he passed that role to Mr. Don Lowry. Mr. Shultz has been an important mentor to me, so I am pleased he has agreed to continue to serve on our Board. Unfortunately, I will miss the sage counsel on complex government matters provided by Mr. Mazankowski, as he has decided to retire from our Board. Based on the strength of our Syncrude asset, our commitment to responsible development, the long-term prospect for crude oil prices and our ability to respond to changing market forces, I look forward to a promising future for our industry and our Company. (signed) Marcel R. Coutu President and Chief Executive Officer February 23, 2010

10 Q&A with Marcel Coutu, President and CEO, and Ryan Kubik, CFO Q: What will change when Canadian Oil Sands becomes a corporation, and what impact will it have on distributions? 8 Not all that much will change. Although we will have a new legal and tax structure, our approach to managing the business will remain the same. As background, the Canadian government is changing the taxation of income trusts effective January 1, Under the new rules, it makes more sense to convert to a corporate entity rather than remain a trust. As a corporation, our approach to dividends will be very similar to our management of distribution payments as a Trust. This means that dividend payments will vary, reflecting changes in crude oil prices, economic conditions, Syncrude s operating performance and our operating and investing obligations. What will change is that, consistent with other corporations, income tax will reduce the amount available for us to distribute. Based on projected federal and provincial tax rates, income in excess of annual tax deductions will be subject to tax at a rate of 26.5 per cent in 2011 and 25 per cent thereafter. By December 31, 2010, we anticipate having total tax deductions of about $2 billion to shelter income for a period of time before income tax is paid. For Canadian investors who hold their Units in a taxable account, their after-tax returns will be similar to pre-conversion because they should be able to receive the benefit of the dividend tax credit. We expect to convert to a corporation on or about December 31, The conversion itself is not expected to trigger any adverse tax consequences to the Trust, or to our Canadian and U.S. resident Unitholders, based on current legislation and external tax advice. Of course, investors are encouraged to consult their own tax advisors regarding any tax matters. We look forward to expanding our investor base when we become a corporation. We know that many investors find Canadian Oil Sands Trust a compelling investment opportunity, but have been discouraged or prevented from investing by the trust structure. This barrier will now disappear, as will the 49 per cent foreign ownership limitation.

11 Q: What are the challenges to reaching design capacity? There is significant value to be realized by achieving design capacity, currently 350,000 barrels per day at Syncrude. Syncrude s costs are largely fixed, so incremental volumes should translate into bottom line results. To reach that point, we need to improve the reliability of our mining, extraction and upgrading operations. In 2008 and the first quarter of 2009, our mining operations constrained our bitumen production, a consequence of falling behind in overburden removal and a decline in the productivity and availability of our mining fleet. Syncrude has brought in additional equipment and employed contractor services to catch up with overburden removal. As well, modest amounts of bitumen were purchased from third parties for periods of time to supplement our own production. These activities contributed to higher operating costs, but alleviated the bitumen shortfall. We believe our mining operations have stabilized, although the focus on mining reliability and bitumen supply will remain a priority as Syncrude moves towards design capacity rates. In upgrading, we suffered unplanned capacity losses in 2009 as a result of various reliability issues, which included unit trips, longer repair cycles and unplanned maintenance. To improve reliability, new operating systems have been introduced, such as ExxonMobil s proprietary Global Reliability System. This system sets in place a maintenance schedule and methodology for identifying and targeting the root cause of operational disruptions. Once fully integrated, we believe this and other systems will allow us to reach design capacity rates on a more consistent, predictable basis. 9 Q: What are you doing to reduce your cost of production? There are two main factors that increase operating costs. The first is inflation, which impacts the entire industry, and the second is reduced reliability. Despite a weaker economy in 2009, demand for labour in the Fort McMurray region remains strong, resulting in inflationary pressure. Labour is a significant portion of our cost structure. Improving operational reliability is our best opportunity to reduce operating costs. Syncrude has incurred additional costs for reactionary maintenance and repairs. Diminished reliability also has resulted in lower production volumes, compounding the cost on a per barrel basis. Producing at

12 design capacity rates would enable us to distribute the relatively fixed costs of our facility over more barrels, thus reducing per barrel operating costs. That is a priority. Once we have achieved design capacity production, we can then focus on identifying further cost reduction opportunities. Yet operating costs are only half of the story. The other half is sustaining capital costs associated with maintaining productive capacity, such as replacement of mining and upgrading equipment. Sustaining capital requirements will vary, and Syncrude has two major projects underway which will increase sustaining capital costs over the next few years. The first is the Syncrude Emissions Reduction project, a $1.6 billion investment with the goal of reducing air emissions, primarily sulphur dioxide, by 60 per cent from current approved levels. Syncrude is about half-way through that project with completion expected in the second half of The second major project involves mine planning. Over the next three to four years, Syncrude will relocate two trains at the Aurora North mine and reconstruct two others at the North mine. The work on these four trains will be done in cooperation with Imperial Oil s Kearl Lake oil sands mining project. Both projects should benefit from cost efficiencies and synergies in project management, design, procurement and labour. 10 The new mining trains should add about 10 per cent incremental bitumen capacity. As well, they will incorporate new, industry-leading Syncrude technology called wet crushing, aimed at lowering maintenance and improving bitumen recovery rates. Q: Is the Management Services Agreement* achieving what you expected? We believe the Management Services Agreement (MSA) is the best way to achieve a fundamental and transformative improvement in Syncrude s operational performance. Syncrude is a complex and integrated mining, bitumen extraction and upgrading facility that requires a disciplined, rigorous approach to operational processes and maintenance. The MSA has brought globally-proven operational systems and expertise into the organization. Most of these systems now have been implemented. As well, senior level Imperial Oil and ExxonMobil people are supporting the Syncrude organization, an important benefit as Syncrude employees with decades of service begin to retire. It has taken longer than we anticipated for the MSA to improve operational reliability. We underestimated the time it would take for new systems and processes to be fully integrated into the organizational culture. Although we are disappointed at the pace of progress, we believe the MSA has set Syncrude on a course for industry-leading performance over the long term. * In November 2006, Syncrude entered into a Management Services Agreement (MSA) with Imperial Oil. The MSA enables Syncrude to access the best practices, proprietary systems and personnel of Imperial Oil and ExxonMobil. Imperial Oil is a 25 per cent owner of the Syncrude Project and ExxonMobil owns nearly 70 per cent of Imperial Oil.

13 Q: What are the plans to expand Syncrude s production capacity? During 2009, Syncrude s expansion plans were further refined based on preliminary design work. When expansions are approved, ExxonMobil will provide the project management expertise, a strong advantage since they have leading global talent and capacity in this area, plus a vested interest in Syncrude s success. Based on recent work done by Syncrude and ExxonMobil (under the MSA growth mandate), we now believe the existing upgrading facility has latent capacity that can be accessed through a series of debottleneck projects, resulting in productive capacity of about 425,000 barrels per day of synthetic crude oil towards the end of this decade. The economics should be strong because we can take advantage of existing infrastructure. Most notably, Syncrude has pre-built coking capacity from its last expansion. The expanded upgrader capacity would be supplied by bitumen from the undeveloped Aurora South mine. Syncrude plans to begin constructing a mining train on Aurora South around 2012 with production expected by the end of Construction on a second mining train is planned to begin around 2014 with production commencing towards the end of the decade. Each mine train is designed for capacity of about 100,000 barrels of bitumen per day, resulting in total bitumen productive capacity of 600,000 barrels per day by 2020 at Syncrude. This volume exceeds the upgrader s processing capacity, resulting in roughly 115,000 barrels of excess bitumen supply. Syncrude is considering incorporating new technology in the construction of the Aurora South mine trains aimed at improving bitumen recovery levels, energy efficiency and product quality. The improvement in product quality would also allow for pipeline transportation and sales of surplus bitumen volumes. 11 Of course, opening a new mining area is capital intensive because it requires infrastructure, such as roads and utilities. In December 2009, Syncrude submitted an update report to the regulators further to the conditions for approval received for Aurora South in Syncrude s joint venture owners would also need to provide approvals to move from scoping work to detailed engineering work and then construction. These growth plans would result in Syncrude broadening its production from the current light, sweet synthetic blend. The decision on product qualities and investment in new upgrading facilities will be based on the economics and further analysis of future crude oil markets, including the price differential between light and heavy product blends.

14 Q: How do you respond to concerns about the environmental impacts of oil sands development? Oil sands development does have a large environmental impact, however, that impact is being managed through responsible stewardship and continued improvements in practices and technologies. The industry is facing two closely related issues; performance and public perception. Since commercial development of the oil sands began roughly 30 years ago, the industry has greatly improved its environmental performance. Syncrude alone invests more than $50 million annually in the development of new technologies and more efficient processes. Such technologies include Low Energy Extraction and the Optimized Low Energy Process, which reduced carbon dioxide emissions from bitumen extraction by about 65 per cent. Sulphur dioxide emissions also are expected to decline by some 60 per cent from current approved levels through Syncrude s Emissions Reduction project. Syncrude now invests $100 million annually in land reclamation. Although it is a long-term process, about 22 per cent of the lands disturbed by Syncrude s operations have been reclaimed; the remainder is still in active use. We also are responding to more stringent regulations; new technologies for tailing ponds are being tested to accelerate the settling of fine fluid tailings to allow for faster reclamation. 12 Our industry is committed to further environmental improvements. These will be particularly important as the industry grows and its overall impact on the environment increases. At both the provincial and federal levels, we are regulated by some of the strictest environmental controls enacted anywhere in the world, but we also have a powerful self-interest to operate with high standards of environmental responsibility. We must think long term this resource will be developed over decades. As part of that future focus, Canada s largest oil sands operators have committed to a set of guiding principles for oil sands development; these are provided on page 15 of this report. Despite our environmental progress, our industry s reputation has been damaged, largely as public perception has been shaped by critics of oil sands development who present a narrow and often inaccurate view. However, as an industry we have failed to communicate openly, and we have not responded as well as we should have to inaccuracies and criticisms of our business. We are working to change that now. We believe it is critical to foster a more balanced, constructive dialogue. We must have the public s support to develop the oil sands, and that support depends on demonstrating responsible environmental stewardship. Without such support, the consequences could be far-reaching, including the loss of markets and new government regulations and penalties that could threaten the viability of the industry.

15 The consequences for Canadians are also far-reaching. The oil sands resource represents the future of Canada s oil supply. Without the oil sands, Canada would become a net importer of crude oil, with the uncertainties of supply, negative impacts on our economy and indeed, on our quality of life. In time, renewable energy sources should become an increasing part of our energy mix, but the development of those technologies will take time and substantial investment. Ultimately, our environmental performance is a critical determinant in the success of our industry. Major strides have been made in developing technologies in the oil sands and improving our processes and efficiencies. These efforts are an important part of our environmental stewardship, which is a critical component in our future. Q: What is the industry doing to communicate better with the public? We believe everyone expects and deserves credible information about energy, the economy, our operations and our environmental performance. The entire industry has become more active and open in telling the oil sands story and in communicating with the public. The website at engages Canadians in an open dialogue on oil sands development. 13 At Canadian Oil Sands, we are speaking directly with Canadians across the country. As President and CEO, I have met with university students, business groups and media in Toronto, Hamilton, Halifax, St. John s and Winnipeg. I intend to visit other cities in the coming months. You can learn more about that effort by visiting Information about the environmental performance of our Syncrude Project, along with other corporate social responsibility indicators, is available in a detailed bi-annual report. In May 2010, Syncrude will publish its 2008/2009 Sustainability Report which will be available at

16 Q: What do you consider to be Canadian Oil Sands merits as an investment? We believe Canadian Oil Sands Trust is a uniquely attractive investment. We offer a pure-play investment opportunity in a long-term crude oil producing asset. Our current intention is to remain unhedged, providing investors with full exposure to crude oil prices. Indeed, Canadian Oil Sands Trust is one of the most highly correlated investments to the price of crude oil. We are an investment in the long-term potential of crude oil. Syncrude contains about 5 billion barrels of light, sweet, synthetic crude oil on a proved and probable reserves basis alone. Contingent and prospective resources* represent another 4.8 billion barrels and 2.0 billion barrels, respectively. That resource should support growing production for decades. In the near-term, we expect to grow production by reaching the design capacity of our existing Syncrude facility. That represents upside of about 25 per cent from 2009 volumes. Beyond that, we intend to expand production by optimizing pre-invested infrastructure, thereby reducing capital risk. 14 Finally, Canadian Oil Sands management is focused on prudent, disciplined financial management to protect the long-term value for our investors. That includes distributing cash payments when supported by the business. * See cautionary language in Advisory on inside front cover.

17 Oil Sands Principles In 2009, Canada s largest oil sands producers developed guiding principles that will govern oil sands development into the future. They are listed below along with Syncrude s commitment to these principles. People We will provide a safe environment for our employees, contractors and the communities where we operate. Safety is Syncrude s priority. Syncrude invests in training, awareness activities, incentives and other initiatives to foster workplace safety. Syncrude provides leadership to the Oil Sands Safety Association, which provides training to oil sands workers. We will provide employment and business opportunities for regional communities, including Aboriginal people. Syncrude continues to be a major economic generator for the Wood Buffalo region. In 2009 Syncrude hired about 700 new employees, with most of them from the Wood Buffalo region. Local contractors secured about 25 per cent, or $500 million, of Syncrude s total procurement in 2009, which included more than $100 million spent with regional Aboriginal businesses. We will consult with directly-affected stakeholders through all stages of our operations. Syncrude liaises on a regular basis with First Nation and Métis communities in Wood Buffalo to learn about community needs and concerns, and to share information about projects. Syncrude participates in multi-stakeholder consultation processes dealing with environment and infrastructure issues. Land We will mitigate our impact on the land while maintaining regional ecosystems and biodiversity. We will progressively reclaim all lands affected by oil sands operations, returning them to self-sustaining landscapes. Syncrude has reclaimed more than 22 per cent (4,600 hectares) of all the land it has disturbed, with the remainder still actively used in operations. Recent studies at Syncrude s reclaimed Gateway Hill area indicate that many different wildlife species are returning to the area, an indication that wildlife activity is similar to that found in undisturbed areas. Syncrude is pioneering the development of a 17-hectare fen wetland; the first constructed fen in the oil sands and part of a larger, 50-hectare watershed. 15 Air We will design and operate our facilities to ensure that regional air quality continues to exceed provincial air quality objectives. Syncrude is constructing a $1.6 billion emissions-reduction project, which should result in a 60 per cent reduction in sulphur compounds from current approved levels once it is operating to specification after We will continue to reduce greenhouse gas emissions per barrel of production by improving our energy efficiency and by developing new technologies. Syncrude is focusing on energy efficiency to reduce greenhouse gas emissions. Energy efficiency has improved by 17 per cent since Syncrude invests in new technology development to reduce emissions and energy consumption; for example, Syncrude developed Low Energy Extraction and the Optimized Low Energy Process, which reduced the thermal energy requirements for bitumen extraction and corresponding greenhouse gas emissions by about 65 per cent. Water We will continue to reduce the amount of fresh water required per barrel of production by improving water recycle rates, using non-potable water sources where feasible, and by developing new technologies. Syncrude recycles over 85 per cent of the water used in its processes. Syncrude is working to identify and implement additional re-use opportunities, and is developing new technologies that promise further efficiencies in water use. We will safeguard the quality of regional surface and groundwater resources. Syncrude continues to contribute to the protection of healthy water sources through its participation in the Regional Aquatics Monitoring Program (RAMP). RAMP integrates aquatic monitoring activities across different components of the aquatic environment, different geographical locations and other developments in the Athabasca oil sands region so that long-term trends, regional issues and potential cumulative effects related to oil sands and other development can be identified and addressed. Syncrude continues its long-standing practice to not release any process-affected water to the environment.

18 Four Areas of Strategic Focus 1. Capital Management 2. Operations Canadian Oil Sands takes a long-term view in setting our financial plan. Syncrude Canada Ltd. is the operator of the Syncrude Project, and runs the day-to-day operations. Areas We value maintaining a strong balance sheet to preserve our investment grade credit ratings, support our business through commodity price cycles, and provide capacity to invest in growth opportunities. We intend to profitably invest a portion of the cash generated in our business into economic oil sands growth opportunities, while returning excess cash to investors through quarterly distributions. Imperial Oil, a 25 per cent owner of the project, provides expertise, systems and people under a Management Services Agreement. Canadian Oil Sands works with Syncrude and its joint venture owners to set the strategic direction for the project and approve significant operational and strategic decisions. Each Syncrude owner is entitled to one vote. Operating decisions require a 51 per cent majority with at least three owners approving, while major growth decisions require unanimous approval Progress Preserved liquidity and financial flexibility with prudent distribution levels and the refinancing of 2009 debt maturities. Maintained a prudent financial position with net debt of $1 billion, or 21 per cent of total capitalization at year end. Increased distributions as crude oil prices improved, paying a total of $435 million, or $0.90 per Trust Unit in Reinstated the Premium Distribution, Distribution Re-Investment and Optional Unit Purchase Plan (DRIP) to support the balance sheet during weak economic conditions; suspended DRIP in the second quarter with improvements in financial position and markets. Achieved a return on average productive capital employed of about 7 per cent. Completed turnaround and modifications on Coker 8-3 complex with aim of improving yield and run length. Completed turnaround on Vacuum Distillation Unit. Turnaround of the LC finer was deferred to Successfully increased bitumen supply by year-end Syncrude s total recordable injury rate in 2009 was 0.36 compared with a rate of 0.59 for While the recordable injury rate declined, a fatality occurred in November that marred the improvement in overall safety Plan Maintain a strong financial position. Mitigate impact of trust taxation through tax pools, anticipated to total $2 billion by the end of Convert to a corporation on or about December 31, Complete a turnaround of Coker 8-1, the LC finer and other operating units. Improve the reliability of the mining, extraction, and upgrading processes at Syncrude. Continue to focus on worker safety by investing in training, awareness activities, and other initiatives. More emphasis will be placed on compliance with procedures and practices. Beyond 2010 Manage net debt in anticipation of funding major sustaining capital projects and growth opportunities. Maintain discipline of paying a quarterly dividend, the amount varying with changes in crude oil prices, economic conditions, Syncrude s operating performance, and operating and investing obligations. Establish sustained design capacity production rates to average 350,000 barrels per day at Syncrude. Relocate 2 mine trains at the Aurora North Mine and reconstruct another 2 mine trains at the North Mine.